Magazine

BW50: Gilead's Big Growth Spurt

April 24, 2005

It was 1999, and John C. Martin finally had something to show for his decade of leadership at fledgling Gilead Sciences Inc. (GILD): Preveon, a promising new drug to combat human immunodeficiency virus (HIV). But late in clinical trials, patients started dying from kidney failure, and the drug had to be scrapped. That was doubly worrying because Gilead's next drug in the pipeline, Viread, was a close cousin to Preveon. With little revenue and big expenses, Martin quickly had to decide whether to pull the plug on Viread. So the former researcher spent months delving into the science to figure out what went wrong. He decided to stick with Viread -- and even predicted that it would be 10 times safer.

Martin was right. Just six years later, Viread is Gilead's top-selling drug, with $780 million in revenues. Even Preveon was salvaged, renamed Hepsera, and sold at a lower dosage to treat hepatitis B. It contributed $112 million to Gilead's top line last year. "He turned a defeat into two wins," says Gilead Chief Financial Officer John F. Milligan.

Martin's low-key yet intense focus has helped make Gilead a rarity: a profitable biotech that can compete with Big Pharma, albeit in a narrow market. It has increased revenues at a 79% average annual clip over the past three years, crossing the $1 billion in sales mark last year, and now boasts the third-largest market value among biotechs, at $17 billion. A slew of recent Food & Drug Administration approvals of its HIV drugs propelled the Foster City (Calif.) company to No. 47 on this year's BusinessWeek 50 list of top corporate performers.

Now, though, Gilead's challenge is to demonstrate that it's equipped to market those new drugs -- and develop other smash hits beyond its stable of HIV combatants. Investors remain unconvinced. That's why Gilead's stock trades at a considerable discount to its peers -- its price-earnings ratio of 39 is minuscule in biotech.

ATLANTIC CROSSING

Gilead finds itself at something of a cultural crossroads as well. The scientist-execs at its helm have preferred to let their industry-leading HIV drugs speak for themselves, in contrast to the pushy pitches doctors get from Big Pharma. But last fall, Gilead poached Kevin Young from biotech giant Amgen Inc. (AMGN) to head sales and marketing. Young brings polish and big-league experience to Gilead's professorial lab types.

The gregarious British native is recruiting new salespeople and hitting the European market hard, with two sales launches there already this year. "We went through this amazing growth spurt, and I think the commercial side is just catching up," Young says, describing Gilead as a gangly teenager. Viread, which makes up 60% of the company's $1.3 billion in revenues, is the linchpin in Gilead's plan to boost its $880 million HIV franchise to $2 billion in coming years, analysts say. Gilead's net income hit $449 million in 2004.

Gangliness aside, Gilead has become a drug-producing force. In less than two years, Viread, Hepsera, and a second HIV drug, Emtriva, have all been approved. That was followed by last year's approval of Truvada, a combination of Viread and Emtriva. It's a testament to Gilead's approach -- pitching only those drugs that have rock-solid trial data behind them. In that same time only 30 drugs were approved industrywide, Martin says.

The downside to these successes? Gilead's pipeline has been sucked dry. As a result, even as it ramps up sales efforts, the company could use another hit drug. Gilead hopes a combination of Truvada and a third drug by partner Bristol-Myers Squibb Co. (BMY) will go to market in 2006. The unnamed triple would be the first time HIV patients could take three necessary treatments for the disease in one pill, once a day -- huge progress from the days when patients took 20 pills. Says Dr. Lisa Sterman, a San Francisco physician: "It's going to revolutionize everything."

EYEING ONCOLOGY

Refilling the pipeline for the long term will be more challenging. Gilead has signed three partnerships in the past six months to help develop new drugs: two for hepatitis C and yet another for HIV. It will foot much of the cost -- at least $300 million -- for clinical trials in exchange for the rights to market the drugs in most of the world. But analysts want something juicier, such as a move into the competitive but lucrative field of cancer research.

That's a hotly contested topic in the sparsely decorated halls of Gilead's headquarters. At issue is whether the company might lose part of what made it a major player in HIV: a tight focus on doing one thing and doing it well. "We've got the cash and the [ability] now, but we spend a lot of time debating the merits of it," says CFO Milligan. Gilead once had three promising oncology drugs but sold off the research division in 2001. The company was strapped for cash, and Martin chose to put everything behind Viread -- a smart move in hindsight. Now Martin says he's eyeing cancer research again: "We certainly didn't get out because we didn't like it. We liked it very much; we just couldn't afford the investment."

Expect something soon. Martin has a proven eye for a good deal and isn't afraid to do a big one. In 1999 the company acquired Boulder, Colo., biotech NeXstar for $550 million. At the time, Gilead was valued at only $1 billion and had $24 million in revenues. The buy was controversial, but it gave Gilead a European sales force and an anti-fungal drug that generated more than $200 million in revenues last year. In 2002, Gilead purchased Triangle Pharmaceuticals Inc., which gave the company its second HIV drug, Emtriva. While Emtriva is not the commercial success Viread is, it's a crucial ingredient in Truvada and the upcoming 3-in-1 pill.

Even as Gilead grows into a full-fledged rival of Big Pharma, Martin will never be a flashy, rock-star CEO (despite his healthy $15 million pay package last year). Last fall, he drove his son to the University of Southern California in a rented U-Haul -- after loading up on cheap, self-assembly furniture at Ikea. "He's a very unaffected human being, and that permeates down the organization," Young says. Martin may be down to earth, but he needs to come up with another high-revenue drug. Gilead is counting on it.